Financial matters can be difficult to discuss with children, but teaching them about money is a valuable skill. A lack of understanding can decrease their chances of having a secure fiscal future. That is why financial literacy is so important.
There is a financial literacy problem in the United States at the moment. It was reported that nearly two-thirds of American adults fail an exam covering financial literacy. To provide your children with the means of not only passing this test but also becoming responsible with their own finances, invest time in teaching them about money by doing the six things discussed below.
1. Give Them a Payday
Many children get a weekly allowance. However, if children are simply given the money, the perceived value decreases and so does their financial literacy. Instead of handing over cash, you can provide a way for them to earn the money.
A simple way of doing this is to give them a job with a payday just like an adult. For example, taking out the trash, washing the dishes and filling up the dog’s food and water bowls could all be worth $1 per day. If they take out the trash twice a week, wash the dishes three times a week, and refill the dog’s bowls every day, your child would have a grand total of $12 per week.
This teaches your child that regular work, such as chores, will be rewarded at the end of every week just like payday for an adult. You could even discuss it with them by explaining how you are paid for the work you do, just like you pay them. It’s a way to introduce financial literacy to your children in a rewarding and meaningful manner.
2. Introduce Opportunity Cost
Once your child realizes the money they earn is theirs to keep, they’ll also understand it is theirs to spend. Rather than letting them run off and buy something right away, teach them about opportunity cost. If they see a toy in the store for $15, make sure they understand that once they spend that money it’s gone.
One way to do this is to make them physically hand cash to the cashier so they realize they aren’t getting it back. If your child has a bank account, allow them to withdraw the money. Or, if they have a piggy bank or clear jar at home they put their allowance in, help them take it out of the jar. This way, they can visually see the money leaving and will have to decide if spending it is worth not having it anymore.
3. Create Borrowing Terms
If your child asks for money to buy something, you can create an agreement for borrowing that money. For example, if your child is short $10 for a new Lego set they want, say you will give them the money but outline terms for when that money must be repaid.
You can set a repayment date, provide extra chores for them to make the money and even create some sort of late fee if they do not pay back the money by the agreed upon date. Then, instead of deducting money from their weekly payday, make them physically hand you the money so they understand how borrowing works. You can have a discussion about how credit cards and loans are much the same. This also teaches the value of saving up for what they really want and following any financial agreements they sign.
4. Explain the Budget
Some parents prefer to keep the family finances a secret. However, including your child when you discuss the budget can help them understand where money is spent. One way you could do this would be to create a chart that clearly shows money for necessities such as food, electricity, cars and even the mortgage. Another way to demonstrate how to budget is to make a game of it.
For example, you could set up a fake bank and keep a wallet of fake money in the amount you make every month. Then, when it comes time to pay bills, you use the fake money and put it in the bank. Your child can help you count the money out and pay it to the bank each month so they understand how you divide your allowance between the necessities and the fun things like going to the movies or an amusement park.
This helps your child understand that there is a set amount of money each month. It can also be a great way for you to have a conversation about responsible spending and begin teaching your children financial literacy.
5. Differentiate Between Want and Need
As your child grows older, it’s important to explain the difference between wanting and needing. Your child may need a new pair of shoes but not a designer pair that costs $100.
Of course, if it’s something your kids absolutely want, you can explain how they can save up the money to buy it at a later date. You can help them create a savings plan and budget to help them reach their goal. For example, if they earn $20 a week from chores and spend $5 a week on ice cream at school, help them determine how long would it take to save up for that $100-dollar item. When they understand that money is a finite resource, you can teach them to decide between what they really need and things they want.
6. Play Money Games
One of the best ways to help children become accustomed to money matters and to understand fiscal responsibility is to let them play games that involve money. This can include Monopoly or online games for children to play where they can earn money to then invest, save or use to purchase items. These games help children understand the basics of money and prepare them for a financially sound future.
Financial Literacy Begins with You
As a parent, you strive to teach your children how to take care of themselves. Part of that includes teaching your children the importance of financial literacy and managing your credit. If you’re struggling with your own finances or credit and want to set a good example for your children, sign up with Lexington Law Firm today to begin your credit repair journey.You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.